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Sell in May and Go Away? Not so fast, according to the numbers.

It is an old investment legend, right along with the "January Effect" and the "Santa Claus Rally:" Sell stocks at the start of the month of May and then buy them back at the end of October. Follow this strategy, so the legend goes, and you will reap profits beyond what the average buy-and-hold investor will receive.

Like most other investment legends, this one is much more myth than fact. To test this theory, we created two portfolios. One portfolio buys the S&P 500* Index on Jan. 1, 1926, and holds that position through April 30, 1926. On May 1, 1926, this stock position is swapped from the S&P 500 Index to 30-day U.S. Treasury bills. This portfolio remains in short-term Treasury bills through Oct. 31, 1926. On Nov. 1, the Treasury bills are sold and the proceeds invested in the S&P 500 Index. On April 30, 1927, the portfolio will have come full-circle. This process is repeated every May and November, ultimately ending with data from April 2008. (* Prior to the S&P 500's birth in 1957, the index referred to was actually the S&P 90. However, the data is typically cited as the S&P 500 Index in this context for purposes of simplicity.)

The results tell the story-an investor who followed this strategy would have been worse off than if they had just held stocks. The "Sell in May and Go Away" portfolio produced an annualized return of 8.30 percent. However, compare this to the return of the S&P 500 Index over the same period, which produced an annualized return of 10.25 percent. The seasonal strategy described above performed nearly two percentage points worse per annum since 1926.

There is, however, a kernel of truth to the theory. It is correct that, going back to 1926, stocks have performed better from November through April than they have from May through October. For this period, the average monthly return for May, June, July, August, September and October was 0.78 percent, while the average monthly return for November, December, January, February, March and April was 1.15 percent.

How is it, then, that the "buy-and-hold" strategy-which includes the worst-performing months-performed significantly better than the "seasonal" strategy? The answer is that there was still an equity premium (the return investors receive from holding stocks beyond that of a "risk-free" investment) during this time period. Remember, the average monthly return to stocks for the months May through October was 0.78 percent. From January 1926 through April 2008, the average monthly return for 30-day U.S. Treasury bills was 0.31 percent. One fundamental idea behind the "Sell in May and Go Away" theory is that for the period from May through October, assets sold at the end of April must not be invested in the market but rather in something "safe." However, since stocks still outperformed Treasury bills even in the "worst-performing" months, an investor would ultimately lose out by following this strategy.

It is important to note that while strategies do not have costs, implementing them does. The "Sell in May and Go Away" strategy failed without even considering the impact of either trading costs or taxes. For investors who have their equities in taxable accounts (the preferred location for those with a choice between taxable and tax-advantaged accounts) such a trading strategy would be highly tax-inefficient.

While we chose to have our analysis examine the data for the longest period available (as that is usually the most meaningful), we can also examine the results of the "Sell in May and Go Away" strategy for various other periods.

As the data in the table below left demonstrates, there have been identifiable periods when the strategy "worked"-at least before taking into consideration the implementation costs of trading and taxes. Consider the following:

From 1960 through 1979, the "Sell In May" strategy provided an annualized return of 9.65 percent-outperforming a buy-and-hold strategy by 2.82 percent per annum. The problem is that prior to that period, the strategy had underperformed. From 1926 through 1959 it underperformed the buy-and-hold strategy by 5.26 (10.33 ? 5.07) percent per annum. Thus, there is no way anyone would have known that the strategy would work beginning in 1960. By the time a sufficiently long enough period had passed to convince an investor that the strategy actually might work, it would have stopped working.

The above example of cherry picking a starting period and ignoring expenses is often the explanation for how myths arise. Randomly, we would expect almost any "system" (at least before expenses) to work-just as there were times when the "Sell in May" strategy "worked." But then another old adage comes to mind: Even blind squirrels find an occasional acorn.

Larry Swedroe is principal and director of research for the Buckingham Family of Financial Services, and author of Wise Investing Made Simple (2007). He can be reached at lswedroe@bamstl.com. Reach Steve Nothum, an investment advisor associate at Buckingham Asset Management, at snothum@bamstl.com. The opinions and comments expressed in this column are their own, and may not accurately reflect those of the firm.